We have written this practical guide, updated to 2019, with all the information you need to proceed with the early repayment of a loan. If you are in possession of the liquidity necessary to pay off your debt, closing the loan early, you must first of all know that it is your right to do it.
But why do it?
Because by paying off a loan early, you can save a lot of interest.
How does the early repayment of the loan take place?
We will try to answer clearly. But meanwhile: is it worth paying the loan in advance? The main reason for early closing a loan is always the same: saving a fair share of charges and interest that would accrue from the day of the extinction onwards.
In fact, extinguishing a loan means repaying the bank in a single solution. This way, you don’t have to pay interest on unpaid installments. These interests, depending on the size of the loan and the installments you can cover with early repayment, can also amount to a few thousand dollars.
In principle, however, we can say that if you are at the beginning of the loan and still have a lot of interest due, it is very advantageous to pay off the loan early. Otherwise – if you have already repaid almost all of the debt, you may find yourself having to pay the bank also the interest losses, in the form of a penalty.
In any case, before deciding whether to pay off the loan early, it is necessary to calculate the portion to be returned to the bank, referring to the loan agreement and the statement of the present situation (it is updated at the end of each installment).
How much it costs to pay off a loan early
First of all, it is the Consolidated Banking Act that tells us that it is possible to pay off a loan (even partially) at any time. However, the same text does not tell us how much early closure can cost you. It depends on the conditions imposed by the bank or the financial company that granted you the loan.
The cost of the extinction operation depends on some factors:
- the amount of the amount you intend to repay
- the expiry time of the contract
If you have a debt of less than $ 10,000 you can pay it off for free – that is, without paying penalties. If the debt is more substantial, the bank can ask you to pay a penalty, however not exceeding 1% of the residual debt.
This figure can be discounted by the bank:
- if more than one year is left until the loan expires, the bank can actually ask you for up to 1% penalty
- if less than a year is left to maturity, the maximum penalty applicable by the bank will be 0.5%.
There is another exception to this rule. These are the new home loans, for which there is no penalty for early repayment.
Partial repayment of a loan
We mentioned earlier the possibility of repaying a loan early, but partially. You can do this if you have liquidity aside, but not enough to cover the entire remaining debt.
What happens in these cases?
If you decide to pay off part of the debt early, the amount of your monthly installment will decrease. As a result, the repayment schedule will be more sustainable.
In summary, the deadline remains the same, but the monthly amounts decrease. Let us give you an example of how the depreciation plan is recalculated. You have a $ 60,000 loan, which you repay in monthly installments of $ 600. If you repay $ 10,000 in a single payment, you will have to pay the remaining $ 50,000 in reduced installments of the same proportion, ie from $ 500. Some banks offer the possibility, instead of reducing the amount of monthly installments, to proportionally shorten the duration of the loan.
However, we recommend that you always contact the loan manager of your bank or the financial company with which you opened the loan, to find out all the possibilities and conditions for early repayment of the debt (even in the event of partial repayment).
In any case, the advantage remains: you can take advantage of a discount on the interest that you will have to pay.
Requesting early extinction: how do you do it?
The procedure is very simple. It is sufficient to send a communication to your creditor with your decision, complete with the financing number, the will to pay off the debt completely or partially, and the eventual date of the transaction. The bank, upon receiving your communication, will prepare the counts to book the closure of the loan on the date you have indicated.
If you have not indicated any date, the closure will be booked for the closest available day. Since the procedures are now completely digital and automatic, it is possible to close a loan on the same day, or at the latest on the next day of the request. Finally, to pay off the outstanding debt, the amount due will be charged to your checking account.
Alternatively, you can ask for the billing from the bank, and make a bank transfer with the currency on the date the loan is extinguished.
One last tip regarding the early repayment of the loan
When you pay off a loan early, the bank or finance company is required to deliver you a document attesting that the outstanding debt has been paid off. However, when you make the “remote” extinction – for example by bank transfer – this document may not be delivered to you immediately. You must be wise and make sure you get hold of the termination document as soon as possible. The document will be used to demonstrate the termination of the loan – necessary, for example, if you wish to access another loan but the loan just ended still exists in the Risk Center.
An example of calculating the early repayment of a loan
Let’s say you have a debt of $ 20,000 as of January 31st, and you want to pay it off by February 10th. The interest rate is 5%, the penalty is 1% (as we have seen).
The total extinction residue is calculated as follows:
- $ 20,000 (residual capital) +
- 200 $ (1% penalty) +
- $ 27.40 (daily diets) =